SMEs, Research & Development, and tax

Construction companies are doing research and development without realising it, and failing to claim tax relief as a result

Civil engineering and construction companies could be losing out on millions of pounds every year due to a lack of understanding about how they can claw back money through research and development tax breaks.

About £16.5bn of tax relief has been claimed since the UK Government’s research and development (R&D) tax credit scheme was launched in 2000. In 2015/16 £2.9bn was paid out across all industries but only £45M of that went to the construction sector, according to the latest HMRC statistics.

Innovation investment

The scheme, which was established to increase investment in innovation, generated a total of 26,255 claims in the same financial year. Only 705 of those claims were made by construction firms, figures show. The industries that consistently make the most claims are the manufacturing, professional, scientific and technical sector; and the information and communication sector. These accounted for a total of 73% and 75% of the total amount claimed respectively, government statistics show.

The main reason for the lack of take up in the construction sector is a mismatch between the definition of R&D in the tax code and in the perception of R&D within the construction industry, says business consultant Invennt director Tim Fitch.

“The phrase R&D often brings to mind scientists in white coats, in a laboratory, looking down a microscope at a petri dish,” he says. “Every single person I ask says that.”

In the construction context, research and development generally happens at the drawing board, in the office, on the construction site

But HMRC, which runs the tax credit schemes, defines R&D as a project that creates new processes, products or services, or which makes improvements to existing ones, and overcomes technological or systems uncertainty.

Overcoming uncertainty, when translated into construction speak, can be understood as risk management and systems integration, Fitch says. The R&D taking place in construction firms is not necessarily happening in laboratories, but it is happening in “doing the doing, in the day-to-day stuff”, he adds. “In the construction context, research and development generally happens at the drawing board, in the office, on the construction site, where people are trying to manage that technical risk.”

In the construction industry this can include finding easier, safer or more environmentally friendly ways of working and developing new materials to advance solutions.

R&D credit guidance

Government R&D credit guidance for small businesses says: “in general, [construction] is a traditional and well-proven industry. However, an increasing number of companies undertake R&D to exceed the traditional methods in terms of life expectancy of buildings, durability or robustness”.

One construction sub-sector cited as participating in research and development is demolition. Companies in this sector have been innovative in coming up with newer, safer, more environmentally friendly methods of demolition, and working within complex constraints. “Many of their projects have some unique characteristics around them, so in effect when working out the method of demolishing an existing structure, often part of that cost qualifies,” Fitch says.

When working out the method of demolishing an existing structure, often part of that cost qualifies

Smaller elements of projects can also qualify as R&D. In its guidance for SMEs, HMRC uses the example of a company that modified a wood coating, allowing it to use cheaper materials with the same qualities. The guide says: “Significantly this development was a small element of an overall conventional project.

“Only after discussion with the site foreman did the company directors realise that the modification and application of the coating qualified for R&D relief.”

The tax scheme was introduced to encourage innovation across British industry, and there are schemes for companies of all sizes. The size of the company influences which of two tax credit schemes it is eligible for.

The government established a scheme for small to medium enterprises (SMEs), which are defined by HMRC as companies with fewer than 500 staff and a turnover of less than €100M (£88.5M) or a balance sheet total of less than c86M (£76M).

Claimable against tax

Costs that can be claimed against tax include staff salaries, subcontractor and freelancer payments, expenditure on materials and consumables, and some types of software.

Larger companies are eligible for a Research & Development Expenditure Credit (RDEC). This tax credit is calculated at 12% of the company’s qualifying R&D expenditure and is worth 10p for every £1 spent on R&D, say tax accountants Forrest Brown.

SMEs that are subcontracted to do R&D work by a large company are also entitled to claim RDEC. The definition of what constitutes R&D is the same under both schemes, although the rate and eligibility criteria differ.

Innovation in civil engineering is often discussed, Fitch says, but a lack of money to invest is a barrier to progress.

Increasing innovation

If the funds that are generated from identifying the research and development that is already being done as part of day-to-day construction are then reinvested in “more traditional” R&D, innovation will increase within the industry.

“Commentators are saying, ‘invest in robots, offsite manufacturing, new ways of working and IT’, all of those things that most people in their gut know is what the industry needs to do, but no one has done it fast enough because there’s not enough money there,” says Fitch.

“The drum that I’m banging is that if you claim this back, you’ll have plenty of money compared to what you’ve currently got.”

“One of the blockers we have got is paying for it [innovation], but we still need the vision around what we are trying to do.

“The money will be there to invest in it, but we still need to have the idea, and manage the idea.”

Government regulation of professional engineering competence is vital to the success of the ICE’s efforts to improve its members’ competence, the leader of the post-Grenfell review of building regulations and fire safety has said.

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